While the Federal Reserve has pulled a somewhat miraculous rabbit out of a hat in convincing the financial world that it has been tightening policy, it seems a worthwhile time to point out the divergence between that narrative and reality.
Friend and fellow precious metals analyst Dave Kranzler recently put the situation in perfect perspective in his Short-Sellers Journal.
“Less than four months ago, the FOMC issued a policy statement that anticipated four rate hikes in 2019 with no mention of altering the balance sheet reduction program that was laid out at the beginning of the QT initiative.
It seems incredible then that, after this past week’s FOMC meeting, that the Fed held interest rates unchanged, removed any expectation for any rate hikes in 2019, and stated that it might reduce its QT program if needed. Perhaps staggeringly, the Fed left open the possibility of increasing the size of the balance sheet – i.e. re-implementing “QE” money printing.”
For the past few years, the Wall Street narrative has been about how the Federal Reserve is undoing the past decade of monetary stimulus. But especially with chairman Jerome Powell indicating that rate increases and unwinding of the quantitative easing balance sheet are becoming less and less likely, it’s worth reviewing just how much of a monetary tightening this has actually been.
Keep in mind that leading up to the subprime bubble, as Alan Greenspan raised rates from his 1% Fed Funds target rate in 2003-2004, his final hike before reversing course was to bring rates up to 5.25% in 2006. Of course one can go even further back to when former Federal Reserve chairman Paul Volcker raised short-term rates to 20% in 1980.
Of course at both of these points in time the debt burdens and monetary balances were significantly smaller. Yet now even a decade after the subprime crisis, the Federal Reserve is already indicating that it’s going to pause with rates at only 2.50%. With the possibility that they might be even more likely to lower rates before hiking again.
Meanwhile, the Fed’s monetary base, which was under $900 billion in September of 2008 remains at about $3.3 trillion today. And keep in mind that even prior to Powell suggesting that he would pause the quantitative tightening, he last year acknowledged that even in a perfect scenario, his new definition of normal included a Fed balance sheet of $2.5-3 trillion.
Not exactly the “ temporary stimulus” idea we were all sold over the past decade.
Further, as Dave quite astutely points out, if the Fed’s assessment of the economy can change so drastically over the course of a few months, why would anybody put much faith or validity into any forecast the Fed offers?
Afterall, this is the same Federal Reserve that claimed the subprime crisis was a perfect storm that no one could have seen in advance. Despite how analysts like Kranzler and the other Austrian School economists wrote about what was happening clear as day. Before it all occurred.
Personally I find it unfortunate that the Federal Reserve provides commentary that so many investors react to, that’s either inaccurate, or possibly even designed to mislead. Yet for those who are able to read through that, it is still possible to insure yourself against the currency risk the central bank has created.
I’ve been writing in this column for the past year-and-a-half how if the Fed continued to raise rates it was going to run into trouble. And eventually likely reverse course. Which is what is now happening. Because the Fed has backed itself into a corner where at this point, there is no easy way out.
Now it’s forced to either continue raising rates and watch the bubbles pop. Or revert back to what it always does and print more money. Of which either scenario presents a favorable environment for gold and silver.
While it will be fascinating to see how the action unfolds, what has become more certain is the ultimate outcome. If you have any questions about why that is, as always you are welcome to email me here.
Yet just keep in mind that all of the Austrian economists who saw the subprime bubble in advance, while the Fed was unable to spot it even after it began to collapse, continue to advocate owning gold and silver as the ultimate insurance to whatever the Fed does going forward.
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